Chinese Banks Set to Accelerate Disposal of NPL’s, Debt-Equity Swaps of Limited Effect
One of China’s leading state-owned asset management companies expects commercial banks to moderately expand their disposal of non-performing loans this year, pointing to the sale of NPL’s as the most effective means for lenders to cull their dud loan levels.
China Orient Asset Management foresees moderate increases in the scale of NPL disposal by commercial banks, as well as the purchase of NPL’s by China’s four main asset management companies.
China Orient also expects NPL disposal prices and disposal yields to undergo moderate gains, and a mild uptick in speculation on the NPL secondary market alongside increased activity on the part of NPL investors.
According to China Orient’s “2017: China Financial Non-performing Asset Market Survey Report” (“2017: 中国金融不良资产市场调查报告) released on 18 July, the most effective means for commercial banks to reduce their NPL ratio remains the sale of NPL’s, while the most feasible method of disposal remains “bundled” transfer.
In China Orient’s estimation debt-share swaps are a method of only “limited effectiveness,” while securitisation and online disposal of NPL’s enjoy standard effectiveness.
“Marketized debt-equity swaps are one path to resolving the NPL pressure of commercial banks, but because of restraint factors including the inadequacy of share characteristics, unsound withdrawal mechanisms, difficulty in raising funds, difficulty in selecting target companies, and management difficulty during the holding period, its effectiveness is limited.”
Diversification of investors on the market for NPL’s has resulted in an ongoing rise in competition, with local asset management companies both cooperating and vying against China’s big four asset managers.
The four big AMC’s enjoy the advantage of being fully licensed and capable of coordinating their operations, occupying the dominant position on the market, yet face problems including high capital costs and inadequate incentive and restraint measures.
Local AMC’s enjoy the advantages of brief establishment times, as well as close ties with local government and financial institutions, yet are hampered by their capital scales, financing capability, as well as limited experience and weak risk controls.
The China Orient report notes that for asset management companies traditional methods for the disposal of NPL’s will confront difficulties, however, with a widespread decline in disposal efficiency.
AMC’s will be more inclined to dispose of NPL’s via co-operative sales, in order to accelerate the pace of disposal as well as overcome the impact of factors including capital scale, and limited disposal experience and disposal capability.
AMC’s will also favour real-estate development loans in 2017, with non-financial NPL’s bringing greater yields as well as risk compared to financial NPL’s.
The credit environment will have an adverse impact upon NPL disposal this year, while gradual improvements to the regulatory environment following the issuance of multiple directives in relation to NPL disposal will have a mildly positive impact.